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What does EMI / Terra Firma tell us about pre-packs? 19 October 2011

The inaugural Insolvency Today conference proved to be a great platform to air some of the issues and it was immediately clear that opinions of those in attendance differed about the proposed rule changes due to be clarified early next year.

Coverage of Citigroup’s acquisition of EMI - the music label which boasts Katy Perry, Lily Allen (pictured) and Blur among its signed artists - has brought the topic of pre-pack administrations firmly into the public domain.

Private equity firm Terra Firma has grumbled that the current pre-pack rules are unfair and led to it losing EMI to its biggest creditor, Citigroup.

Now the company is taking PricewaterhouseCoopers to court. The buyout firm is hoping to obtain documents, which prove Terra Firma would have continued to service the loan from Citigroup until the agreed date in 2015.

Questions remain in this case as to whether it would have been possible for Citigroup to take ownership of the business if a pre-pack administration were conducted under the proposed ‘three-day’ rules.

Financial strength

There is certainly an incentive for banks to use the current rules to their advantage. After all, they are under pressure in the current climate to improve their financial strength and reduce exposure to risky loans.

Those familiar with the EMI case have questioned whether the current pre-pack rules allowed Citigroup to snap up the assets despite the fact that every loan repayment had been made on time by Terra Firma.

The private equity firm is understood to be one of a group of businesses in favour of the introduction of a minimum of three days before a pre-pack could be executed.

Experts on the EMI deal suggested that the private equity firm may have been able to produce a counter-proposal to the pre-pack, were the three day time rule in force back in February.

Not necessarily an improvement

However, those arguing against the introduction of a three-day period say that practitioners would find it impossible to execute a pre-pack at all if a compulsory three days had to be given.

It has been assumed by critics that any fixed extended period will increase the likelihood of suppliers withdrawing credit lines and will lead to customers ceasing to do business with a company.

Either way, one thing remains abundantly clear - the need for further debate on this subject – or risk being lumbered with a completely unworkable set of rules. 

By Joe McGrath



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